Eurozone finance ministers agreed to give the permanent bailout fund the authority to "directly capitalize" banks, but national governments will have the responsibility to ensure the minimum capital buffer.
Elsewhere, the International Monetary Fund settled concerns over Greece funding conditions with the assurance that the country will not face any financing problems if it completes the current review by the end of July.
In the total EUR 500 billion, the European Stability Mechanism, the bailout fund can utilize only EUR 60 billion to recapitalize banks, euro area finance ministers agreed at a Eurogroup meeting held in Luxembourg on Thursday.
"This instrument will help preserve the stability of the euro area and help remove the risk of contagion from the financial sector," Jeroen Dijsselbloem, chair of the group of Eurogroup said late Thursday.
An important step on the way to the banking union has been made, German Finance Minister Wolfgang Schaeuble said.
Ministers expect this new directive to be in place by next year, after the European Central Bank and the European Banking Authority conduct stress tests and before the ECB takes over the job of bank supervision.
The guidelines require banks to maintain the common tier 1 capital ratio of 4.5 percent. The ESM could intervene only if banks have this minimum capital requirement.
The national government should contribute at least 20 percent of the ESM capitalization cash if banks already hold basic capital ratios. The amount will decrease to 10 percent after two years.
Ireland and Spain had spent billions to prop up failing banks. The latest consensus on 'direct recapitalization' left open the possibility that these nations could transfer their past bailout loans to the ESM retroactively.
It should be decided on a case-by-case basis and by mutual agreement, Dijsselbloem said.
Concerns over Greece were triggered by reports that central banks in Europe are hesitant to roll-over loans to the troubled country.
"If the review is concluded by the end of July, as expected, no financing problems will arise because the program is financed till end-July 2014," Gerry Rice, an IMF spokesman said in a statement.
Rice also said important progress has been made and policy discussions will resume by the end of the month.
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